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Appendix A. The History of Federal Block Grant Authorities

Medicaid block grant proposals have been the leitmotif of Medicaid policy for the past three decades. Indeed, the tensions inherent in operating an open-ended entitlement program have been evident from the onset of the federal-state Medicaid program. In 1967, the second year of program operations, Congress became so concerned by the rapid growth in Medicaid outlays it enacted legislation designed to curb program expenditures (P.L. 90-248).55

This was the first in what was to become a recurring series of legislative and administrative efforts to rein in federal Medicaid outlays.

The earliest examples of federal block grant programs were enacted in the late 1960s when Democrats controlled both chambers of Congress and the White House. Congress created the Partnership for Health program in 1966 by combining several categorical health grants under a single program umbrella and the Safe Streets program two years later as part of the Omnibus Crime Control and Safe Streets Act of 1968.56

Nixon-Era Block Grants

The first major, sustained wave of block grant proposals occurred in 1971, when President Nixon proposed that 129 distinct federal programs be consolidated into six block grants. A Democrat-controlled Congress rejected the President’s original program consolidation plan, but nonetheless by the end of the Ford Administration Congress had enacted three sizable block grant programs. In each instance, spending under the block grant programs of the 1970s was greater than aggregate outlays under the categorical programs they replaced. Even states and cities that qualified for a smaller share of federal aid under the applicable funding formulas received more money than they had under the predecessor programs.57

The Reagan Revolution

During the Reagan Administration, the focus changed and block grants became a vehicle for shrinking the role of the Federal Government and devolving responsibility for financing and administering domestic assistance program to state and local jurisdictions. A Medicaid block grant proposal was a major linchpin of the President’s sweeping 1981 plan to shift fiscal responsibility and control back to state and local jurisdictions. Under the Medicaid portion of what came to be known as "Reaganomics," federal financial participation was to grow by 5 percent in FY 1981 and be adjusted annually thereafter by a gross national product deflator. Administration budget officials calculated that the cap would save the Federal Government $1.1 billion in FY 1982, with the amount of savings growing steadily in future fiscal years. The President also proposed a number of statutory and regulatory changes designed to afford states greater flexibility in designing and managing their Medicaid programs. Included was a proposal to allow the Secretary of Health and Human Services to waive certain statutory requirements in order to permit

states to substitute home and community-based services for Medicaid recipients who otherwise would require care in a nursing home or another type of long-term care institution.58

Broad elements of the Reagan plan were approved by Congress as part of the Omnibus Budget Reconciliation Act of 1981 (P.L. 97-35; OBRA-81). But, after extensive debate and several close committee votes, Congress rejected the President’s plan to cap federal Medicaid spending and convert the program into a block grant authority. Instead, Congress enacted temporary reductions in state matching ratios over a three-year period, after which matching rates returned to pre-existing levels. The final Medicaid amendments of OBRA-81 also included a modified version of the home and community-based waiver authority initially proposed by the Reagan Administration (Section 2176 of P.L. 97-35, later codified as Section 1915(c) of the Social Security Act).59 Though widely ignored at the time, the waiver authority was to have a far-reaching impact over the next three decades on rebalancing Medicaid expenditures on institutional versus home and community-based services.

Gingrich Plan

In 1995, the Republican-controlled 104th Congress, under the leadership of House Speaker Newt Gingrich (R-GA), unveiled a Medicaid block grant proposal that deviated in several important ways from earlier plans to convert Medicaid to a block grant program. Referred to as the Medigrant program, the Speaker’s plan, as subsequently modified during committee mark-up sessions, would have based the federal funding cap on a complicated formula designed to measure each state’s relative needs. A state would be obligated to operate its program under an annual federal spending cap that took into account historical spending adjusted for state input costs (e.g., local wage rates), case mix (e.g., the relative acuity of need among program enrollees), and the number of poor people in the state. The actual amount of a state’s funding allotment then would be reduced on a pro-rated basis to ensure that expenditures in all states remained under an annual aggregate Medicaid spending cap specified in the law. The proposal, with modifications, was approved by the House of Representatives and the Senate as part of a much larger measure aimed at balancing the federal budget.60 However, President Clinton vetoed the legislation on December 6, 1995;61 and, although Republican lawmakers included a modified version of the Medigrant plan in 1996 welfare reform legislation, it was dropped before the bill was sent to the White House.

President Clinton signed into law a welfare reform measure that repealed the AFDC program and replaced it with the TANF state block grant program. Passage of this legislation marked the first and to date only time that Congress has agreed to transform an open-ended entitlement into a state block grant authority.

Bush Plan

In January 2003, President George W. Bush unveiled a proposal that offered states the option of accepting federal block grant funding in return for higher federal Medicaid aid in

the near term, enhanced administrative flexibility in operating their programs, and authority to reduce the state’s share of program costs. As sketched out in the President’s FY 2004 budget, an aggregate cap linked to annual budget targets was to be imposed on federal Medicaid and State Children’s Health Insurance Program (SCHIP) spending. Relative to the Administration’s Medicaid spending projections under existing law, the proposed federal "allotments," or block grants, were to be higher in FY 2004 through FY 2010 but lower in FY 2011 through FY 2013, resulting in "budget neutral" federal spending over the 10-year period.62

To qualify for federal funding under the President’s plan, a state would have to spend a predetermined amount on health services each year, with the amount referred to as "maintenance of effort" (MOE). The MOE level was to equal the amount the state spent in FY 2002, adjusted annually thereafter by the rate of increase in medical costs. One analysis of the impact of the plan estimated that spending by states accepting the block grant option would be hundreds of billions of dollars less over the 10-year period than it would be under existing law.63 States choosing the option also would have been subject to fewer federal rules governing optional services and population coverage.

Instead of fleshing out the specifics of its block grant plan, the Bush Administration asked the National Governors’ Association (NGA) to hammer out the details. The NGA created a bipartisan task force charged with producing a consensus plan. But the task force disbanded in June 2003 after failing to achieve agreement. Preoccupied with legislation to add a Medicare prescription drug benefit, Congress never considered the President’s Medicaid/SCHIP reform proposal. The President’s FY 2005 budget stated that "the Administration remains committed to enacting legislation which will reform Medicaid and SCHIP."64 Specific legislation to accomplish this objective, however, was never submitted to Congress, and the plan was quietly shelved.